Investors' allocation to emerging markets has not kept up with the growth of these markets in recent years. As a result, investors are under-allocated to emerging markets and are losing out on returns, global fund manager Fidelity said.
The share of emerging markets in the market cap-weighted MSCI All Country World Index has risen from around 4.5 per cent at the end of 2003 to 13.6 per cent at present.
"Goldman Sachs forecasts that this share will rise further to 19 per cent and 31 per cent respectively in 2020 and 2030, with China alone projected to account for 13 per cent of the index in 2030," Fidelity investment director Tom Stevenson said.
But allocations by retail investors in Australia have not kept up with the growth of these markets.
According to figures from Plan for Life, at the end of December 2010 only 0.5 per cent of the total $513 billion in retail funds under management was allocated to emerging markets.
Fidelity said this home bias was mainly due to behavioural factors.
"This may include familiarity biases - a preference for assets or 'names' that are simply more familiar-sounding to investors, which in turn may be based on assumptions about having an information advantage over things that are in closer proximity to them," Stevenson said.
Investors who are biased towards their home investment markets may not be taking advantage of the diversification opportunities that are available to them, Fidelity said.
"Investors that exhibit home bias may receive inferior risk-adjusted returns from their portfolios as a result," Stevenson said.
Other reasons for a home bias are investors' perceptions of lack of information on emerging market equities and regulatory limits that prevent foreign investment.
"The overall global trend in the past few decades has been towards a lessening of these kinds of factors," Stevenson said.
"Although some meaningful limitations for outward foreign investment remain, notably currency risk, this is not sufficient to explain the full extent of investor home bias that is still in evidence today in many countries," he said.
